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There is only one thing that draws scrap to a local market . . . money

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Some scrap buyers and brokers are a little troubled about what steelmakers will melt for the rest of this year. The supply of scrap has not reached the shortage stage, but it has dried up. How can that be when no one was buying much scrap for the first six months of this year?

The perception is not true. There were more than a few buyers in the U.S. market—most of them from Asia. Exports to South Korea, India, Turkey and several smaller nations like Vietnam rose to levels that had not been seen for years. China, that bottomless abyss for scrap and iron ore, was the top buyer for much of the first half of this year until prices reached $350 a tonne, when they backed away from the international scrap market.

The mechanism of offshore markets has changed radically in the past few years. One sign of that change is the volume of shredded being shipped overseas in containers. Virtually every major scrap processing equipment maker is now offering machines to load 20- and 40-foot containers with shredded and heavy melt. This has drawn a whole new network of scrap sellers to the offshore market, many of them mid-sized dealers with shredders who used to sell their output to steelmakers and then to the export yards if the steelmakers weren't buying. Nowadays, even the smaller yards can afford the machinery to load containers and are selling their scrap to foreign traders.

Twenty years ago, a report by Washington-based consultantcy Robert R. Nathans Associates Inc. said not to worry, there were millions of tons of ferrous scrap available in the U.S. market. That study was a response to an earlier report by the late Father William Hogan, a prominent steel industry analyst who warned that scrap shortages were likely to recur throughout the 1980s. Those shortages never occurred—at least not to the extent that Hogan anticipated. Scrap supplies were tight from time to time, both in those days and now, but there was always one mill or broker willing to pay a few more dollars more than his rivals for No. 1 bundles or plate and structural scrap—and that is the key, underlying part of the problem.

Steelmakers may not face a shortage today, but the supply is tighter than it has been in decades. For example, Nucor Corp. bought cargoes of busheling and shredded scrap from Europe, although to some it seemed like the big steelmaker was bringing in extra supplies to help hold down the domestic scrap price.

At the same time, the integrated mills re-lit five blast furnaces, a sign that they expected stronger demand for sheet products from the automakers. Unfortunately, at least one of those big mills had little scrap at two of its largest plants because during the slowdown earlier in the year it shipped much of the scrap inventories it had to smaller operations that it owns, so it had to go out in the market and replenish its scrap inventories.

There may be enough ferrous scrap in the country to fill the needs of both the integrated and electric-arc furnace mills, as that old study said. But that isn't the main question. Scrap users should be asking how accessible that material is. Is it worthwhile tearing down an old factory in a small town, which is likely to yield maybe 20 or 30 tons of I-beams from the floor supports and a few tons of tinplate from the roof?

Some may think that the federal government's "Cash for Clunkers" program will help fill up the supply pipeline, but that's hardly the case. Each of the three billion dollars the government ponied up reeled in about 250,000 cars at best. So with the government shelling out $3 billion overall, that's 750,000 cars for the junkyards and shredders. In a market that sells 16 million cars a year, that equates to less than 5 percent of the market. The total figure in terms of shredded scrap generated by the program is 20.5 million tons, a healthy portion of which will no doubt find its way into the export market.

There is really only one thing that draws out scrap—money. When dealers and processors cut the prices at the scale, peddlers don't bring much metal to the yards, the demolition contractors lay off their crews and wait for prices to rise so they can bid on the bigger wrecking jobs, and auto junkyards pile cars two or three high and wait for the prices they want from the shredders. Auto junkyards don't need to see the hulks when the price is $100 a ton or less; they just leave them in the yard, sell parts off them and unload a few of the wrecks that have been picked clean to pay the bills in the meantime.

But what's a steel mill buyer to do when he has a production schedule to meet and a melt shop demanding scrap? What usually happens is the mills outbid each other for whatever scrap is available. One mill agrees to pay $250 a ton for 5,000 tons of a scrapyard's No. 1 heavy melt. A broker for another mill hears about the sale, calls the yard and offers $255 or $260 a ton to make sure his client gets that scrap. Prices start to spiral upward. And the original buyer maybe gets half of the metal he ordered later in the month, along with a promise that the rest will be delivered the following month at this month's price even if the price has spiked another $10 to $20 a ton.

Mill buyers and brokers often complain about the greed of the dealers that makes the market jump. Just as often the fuse that lights up scrap prices is steel mills outbidding each other for whatever scrap is available.

Michael Marley

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